Introducing “The Economics of Everyday Things” | Freakonomics

Intro

In this episode of the Freakonomics podcast, titled “Introducing “The Economics of Everyday Things”,” we delve into the fascinating world of gas stations and explore the economics behind this everyday necessity. Host Stephen J. Dubner takes us on a journey to uncover the truths and misconceptions surrounding gas station ownership, the costs involved, and the potential impact of electric vehicles on the industry.

Main Takeaways

Gas Station Ownership and Operations

• 8 out of 10 gas stations in the US are owned by independent operators who pay oil companies for branding and gas.
• Gas station owners are not swimming in cash despite memes and accusations, as the gas business is a penny business.
• Gas station owners make about 30 cents for every gallon of gas they sell on average.
• Gas station owners have a lot of overhead costs to cover, including maintenance, rent, and liability.
• Gas station owners usually buy a few days worth of gas at a time, which they store in underground tanks.

The Economics of Gasoline

• Americans use 374 million gallons of gas every day, around 30 full tanks per registered vehicle per year.
• The majority of oil used in the US comes from domestic production in Texas, New Mexico, North Dakota, and Montana.
• 50-60% of the cost of gasoline is the cost of crude oil.
• Rising fuel prices lead to squeezed margins, less volume, and theft.

The Convenience Store Business

• Gas station owners make most of their income from selling food and other items in the convenience store.
• High grossing items in the convenience store include coffee (50% of sales), candies (40-45% of sales), and beer (25% of sales).

The Impact of Electric Vehicles

• Electric vehicles pose an existential threat to gas station owners.
• Installing EV chargers can cost upwards of $100,000.
• Some station owners are waiting to see how things play out, while others plan to install EV chargers soon.

Summary

Gas Station Ownership and Operations

Gas station ownership is predominantly in the hands of independent operators who pay oil companies for branding and gas. Despite common misconceptions, gas station owners do not make significant profits, as the business operates on slim margins, earning around 30 cents for every gallon of gas sold. They face numerous overhead costs, including maintenance, rent, and liability. Additionally, gas station owners must carefully manage their inventory, purchasing a few days’ worth of gas at a time and storing it in underground tanks.

The Economics of Gasoline

Gasoline consumption in the United States is staggering, with Americans using 374 million gallons of gas daily. The majority of oil used in the US comes from domestic production in states like Texas, New Mexico, North Dakota, and Montana. Approximately 50-60% of the cost of gasoline is attributed to the cost of crude oil. Rising fuel prices can significantly impact gas station owners, leading to squeezed profit margins, decreased volume, and an increased risk of theft.

The Convenience Store Business

While gasoline draws customers to gas stations, the core of the gas station business lies within the convenience store. Gas station owners generate most of their income from selling food and other items in the store. Coffee, candies, and beer are high-grossing items, accounting for a significant portion of convenience store sales. These additional revenue streams help offset the lower profit margins associated with gasoline sales.

The Impact of Electric Vehicles

Electric vehicles pose a significant challenge to the traditional gas station model. As more people switch to electric cars, gas station owners face an existential threat to their business. The installation of EV chargers can be a costly endeavor, with expenses reaching upwards of $100,000. Some gas station owners are adopting a wait-and-see approach, monitoring the market’s evolution, while others are proactively planning to install EV chargers to adapt to the changing landscape.

Conclusion

Gas stations are not as lucrative as they may seem, with gas station owners operating on slim margins and relying on the convenience store business to generate the majority of their income. The economics of gasoline, including the cost of crude oil and rising fuel prices, significantly impact their profitability. The emergence of electric vehicles poses an existential threat, forcing gas station owners to consider the installation of EV chargers to remain relevant in the evolving automotive landscape.